Hey Gold Bugs! The Dollar Still Matters!

Feb.21.13 | About: SPDR Gold (GLD)

The price of gold has moved higher 13 straight years. Even if gold were to finish lower in 2013, 13 out of 14 years of the price of gold going higher is a very good trend. Heck, even the S&P got 8 good years out of the last 13, and people still invest in stocks.

Over the last few years, we keep hearing gold bugs talking about the weaker dollar. But ironically, the price of gold started its current trend down within days of the strong move up in the dollar, as seen in the Dollar Index chart below.

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Gold was trading at $1,895 an ounce on September 6th, had fallen to $1,855 an ounce by the time of the huge move in the dollar on September 9th, as seen in the chart above, and by September 26th, gold had fallen to $1,598. As of this article, gold is presently trading at $1,572. The Dollar Index moved from the 74 range in September of 2011 to its present 81 range. The move up in the dollar since September 9,2011 is 8.6%.

The Dollar Is Still Relevant

The Dollar Index is simply a representation of other currencies, primarily the euro, yen and pound, which make up 83.1% of the dollar. If 83.1% of the countries that make up the Dollar Index are trying desperately to weaken their currency to become more competitive and generate GDP, by default, the dollar will get stronger. This is true despite the ever growing issues in the United Sates with debts and deficits, as well as Federal Reserve Quantitative Easing in their own attempts to stimulate the economy. Perception from abroad is that the dollar is a safer bet than the euro, yen and pound. Why else would Treasuries be so strong, as seen in the ProShares Ultra 7-10 Year Treasury (NYSEARCA:UST) chart below?

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But with a stronger dollar, there is something many of those invested in gold may not realize. If you bought gold at $1,570 in 2011, and gold today is at $1,570, you have gained 8.6% in purchasing power because your gold is priced in dollars. This is the equivalent of a $135 move in the price of gold ($1,570 x 8.6%), or to put it another way, an extra $135 in purchasing power of foreign goods where their currency has become weaker.

The only ones who have been hurt by this current downturn in the price of gold are those who bought gold higher than $1,570. At least so far. But the future is still bright for gold, and once this downturn has finished, for a multitude of reasons ranging from banking to unsustainable debts, deficits as well as interest that eats into GDP. Gold will return to the uptrend it has been experiencing for over a decade.

Buying gold on dips is still a good recommendation. I prefer owning physical gold and taking control of your wealth, no matter what might happen. There are ETF proxies to gold like the SPDR Gold Trust (NYSEARCA:GLD) or silver via the iShares Silver Trust (NYSEARCA:SLV) that one can trade with. Dollar cost averaging into a position during these dips is still a good move if you believe debts and deficits do matter.


I am a gold bull, and dollar bullish, at least for now. The dollar moving higher is something most talking about gold don't mention because it goes against their premise of why one should buy gold. I have been warning about a stronger dollar and its possible affect on the price of gold for over a year now. But I also have been giving other reasons why one should own gold as insurance, primarily through my research of the nation's largest banks.

If the yen, where gold priced in yen has risen 19% the last 6 months, and the euro are weakening, by default the dollar is rising, putting short-term pressure on gold. Same goes with the British pound.

But all currencies have been losing the battle to gold the last 2,3,4,5,6,7,8,9,10,11,12 years straight. The Fed pumping a little life into the economy may have some thinking the euphoria is back and the pain and suffering is over. But no one is selling their physical gold they bought at mostly lower prices. More buyers will come once the sentiment changes. I had a record day of sales yesterday. I didn't tell people to buy that day, but many are dollar cost averaging into their allocation to gold in anticipation of what's to come. I have said many times in my articles that investing in gold is the tortoise vs. the hare of debt approach one should take. The Fed is still relevant, for now, but debt and deficits do matter.

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So what's next for gold? A bounce followed by a further pullback in gold breaking to fresh lows is on the horizon. Market Makers like to make investors scream UNCLE, if they can. They will move the price higher over the short term with the goal of getting new investors to think the bottom for gold prices is in (especially those who buy on margin), and then pull the rug out from under them, slamming the price lower. I have seen this pattern 100 times. Eventually, a bottom will be put in, and I will attempt to call it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I sell gold and silver as a broker/dealer offering a bid and ask price for bullion coins and bars.